Discover Financial Services Reports Fourth Quarter Net Income of $513 Million or $0.95 Per Diluted Share

Discover Financial Services Reports Fourth Quarter Net Income of $513 Million or $0.95 Per Diluted Share08:30 EST Thursday, December 15, 2011
RIVERWOODS, Ill. (Business Wire) -- Discover Financial Services (NYSE: DFS) today reported net income of
$513 million for the fourth quarter of 2011, as compared to $350 million
for the fourth quarter of 2010.
Fourth Quarter Highlights
Total loans grew 17% from the prior year to a record $57.3 billion.
The company purchased an additional $2.4 billion in private student
loans in the fourth quarter.
Credit card loans grew 3% from the prior year and Discover card sales
volume was up 8%.
The delinquency rate for credit card loans over 30 days past due
continued to improve, declining to 2.39%. The credit card net
charge-off rate declined to 3.24%.
Payment Services pretax income was up 35% from the prior year to $42
million. Transaction volume for the segment was $43.3 billion in the
quarter, an increase of 7% from the prior year.
“We are pleased to report another quarter of very strong performance as
we generated organic growth in all loan products, had continued
improvement in credit and demonstrated solid expense control,” said
David Nelms, chairman and chief executive officer of Discover. “Our
fourth quarter results, together with our already strong capital levels,
allowed us to increase our dividend and execute on our share repurchase
program.”
Nelms added, “Our results this quarter cap a year of outstanding
performance, with all-time record net income of $2.2 billion and a 30%
return on equity for the full year. We achieved record volume of over
$280 billion across all of our networks. We further enhanced our
competitive position in private student loans by completing two
successful and earnings accretive acquisitions.”
Segment Results:Direct Banking
Direct Banking pretax income of $776 million in the quarter was up $222
million, or 40%, from the prior year.
Discover card sales volume grew 8% from the prior year to $25.0 billion.
The increase was driven by growth in spending from both new and existing
customers. Credit card loans increased, ending the quarter at $46.6
billion, up $1.5 billion or 3% from the prior year.
Total loans ended the quarter at $57.3 billion, up $8.5 billion, or 17%,
compared to the prior year. Private student loans increased $6.3
billion, including the acquisition of $3.1 billion in loans in the first
quarter of 2011, and an additional $2.4 billion in the fourth quarter of
2011. Personal loans increased $770 million from the prior year.
Net interest margin was 9.10%, down 18 basis points from the prior year
and 16 basis points from the prior quarter. The decrease in net interest
margin in both periods reflects the acquisitions of student loans which
have lower yields as well as a decline in credit card yield, partially
offset by lower funding costs. Credit card yield was 12.36%, a decrease
of 32 basis points from the prior year and 10 basis points from the
prior quarter. The decline in credit card yield reflects the impacts of
the CARD Act, an increase in promotional rate balances and an increase
in customers who pay their balance in full, partially offset by lower
interest charge-offs. Interest expense as a percent of total loans
decreased 50 basis points from the prior year and 11 basis points from
the prior quarter as the company continued to take advantage of
available low rate funding.
Net interest income increased $136 million, or 12%, from the prior year,
primarily driven by an increase in loan balances related to the student
loan acquisitions, an increase in personal loans and lower interest
expense. Interest income on credit card loans was relatively flat
compared to the prior year as a decline in yield was offset by an
increase in loan balances.
The delinquency rate for credit card loans over 30 days past due was
2.39%, an improvement of 167 basis points from the prior year, and 4
basis points from the prior quarter. The credit card net charge-off rate
decreased to 3.24% for the fourth quarter of 2011, down 371 basis points
from the prior year and 61 basis points from the prior quarter.
Provision for loan losses of $319 million decreased $64 million, or 17%,
from the prior year, driven by lower charge-offs, partially offset by a
lower reserve release. Principal charge-offs decreased $410 million from
the prior year as a result of the continued decline in delinquencies in
2011. The reserve release for the fourth quarter of 2011 was $68
million, versus a release of $414 million in the fourth quarter of 2010.
Other income increased $66 million, or 16%, from the prior year. The
fourth quarter of 2010 included a $28 million charge related to federal
student loans classified as held for sale. Discount and interchange
revenue increased from the prior year reflecting higher sales volume.
Late fees increased, reflecting a decline in late fee charge-offs.
Expenses were up $44 million, or 7%, from the prior year, reflecting
increased compensation costs, expenses related to The Student Loan
Corporation and investments in growth initiatives.
Payment Services
Payment Services pretax income of $42 million in the quarter was up $11
million, or 35%, from the prior year. Revenue increased $8 million,
primarily driven by an increase in transactions on the PULSE network and
higher margins. Expenses decreased $3 million, reflecting lower
marketing costs related to timing of programs.
Payment Services dollar volume was $43.3 billion for the fourth quarter,
up 7% from the prior year, driven by higher PULSE, Diners Club
International and third-party issuer volume.
Dividend
The company's board declared a cash dividend of $0.10 per share of
common stock, payable on Jan. 19, 2012, to stockholders of record at the
close of business on Dec. 29, 2011.
Share Repurchases
The company repurchased 9.6 million shares in the fourth quarter for
$227 million, bringing the total shares repurchased for the program to
18.0 million or $425 million.
Conference Call and Webcast Information
The company will host a conference call to discuss its fourth quarter
results on Thursday, Dec. 15, 2011, at 9:30 a.m. Central time.
Interested parties can listen to the conference call via a live audio
webcast at http://investorrelations.discoverfinancial.com.
About Discover
Discover Financial Services (NYSE: DFS) is a direct banking and payment
services company with one of the most recognized brands in U.S.
financial services. Since its inception in 1986, the company has become
one of the largest card issuers in the United States. The company
operates the Discover
card, America's cash rewards pioneer, and offers personal and
student loans, online savings accounts, certificates of deposit and
money market accounts through its Discover
Bank subsidiary. Its payment businesses consist of Discover Network,
with millions of merchant and cash access locations; PULSE, one of the
nation's leading ATM/debit networks; and Diners Club International, a
global payments network with acceptance in more than 185 countries and
territories. For more information, visit www.discoverfinancial.com.
A financial summary follows. Financial, statistical, and business
related information, as well as information regarding business and
segment trends, is included in the financial supplement filed as Exhibit
99.2 to the company's Current Report on Form 8-K filed today with the
Securities and Exchange Commission (“SEC”). Both the earnings release
and the financial supplement are available online at the SEC's website (http://www.sec.gov)
and the company's website (http://investorrelations.discoverfinancial.com).
This press release contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, which speak to our expected business and financial
performance, among other matters, contain words such as “believe,”
“expect,” “anticipate,” “intend,” “plan,” “aim,” “will,” “may,”
“should,” “could,” “would,” “likely,” and similar expressions. Such
statements are based upon the current beliefs and expectations of the
company's management and are subject to significant risks and
uncertainties. Actual results may differ materially from those set forth
in the forward-looking statements. These forward-looking statements
speak only as of the date of this press release, and there is no
undertaking to update or revise them as more information becomes
available.
The following factors, among others, could cause actual results to
differ materially from those set forth in the forward-looking
statements: changes in economic variables, such as the availability of
consumer credit, the housing market, energy costs, the number and size
of personal bankruptcy filings, the rate of unemployment and the levels
of consumer confidence and consumer debt, and investor sentiment; the
impact of current, pending and future legislation, regulation and
regulatory and legal actions, including new laws and rules related to
financial regulatory reform, new laws and rules limiting or modifying
certain credit card or student lending practices, new laws and rules
affecting securitizations, funding and liquidity, and bank holding
company regulations and supervisory guidance on the company's ability to
execute its business strategies; the actions and initiatives of current
and potential competitors; the company's ability to manage its expenses;
the company's ability to successfully achieve card acceptance across its
networks and maintain relationships with network participants; the
company's ability to sustain and grow its private student loan business;
the company's ability to manage its credit risk, market risk, liquidity
risk, operational risk, legal and compliance risk, and strategic risk;
the availability and cost of funding and capital; access to deposit,
securitization, equity, debt and credit markets; the impact of rating
agency actions; the level and volatility of equity prices, commodity
prices and interest rates, currency values, investments, other market
fluctuations and other market indices; losses in the company's
investment portfolio; restrictions on the company's operations resulting
from financing transactions; the company's ability to increase or
sustain Discover card usage or attract new customers; the company's
ability to attract new merchants and maintain relationships with current
merchants; the effect of political, economic and market conditions,
geopolitical events and unforeseen or catastrophic events; fraudulent
activities or material security breaches of key systems; the company's
ability to introduce new products or services; the company's ability to
sustain its investment in new technology and manage its relationships
with third-party vendors; the company's ability to collect amounts for
disputed transactions from merchants and merchant acquirers; the
company's ability to attract and retain employees; the company's ability
to protect its reputation and its intellectual property; difficulty
obtaining regulatory approval for, financing, closing, transitioning,
integrating or managing the expenses of acquisitions of or investments
in new businesses, products or technologies; and new lawsuits,
investigations or similar matters or unanticipated developments related
to current matters. The company routinely evaluates and may pursue
acquisitions of or investments in businesses, products, technologies,
loan portfolios or deposits, which may involve payment in cash or the
company's debt or equity securities. The company's pending acquisition
of the mortgage origination business of Tree.com, Inc. is subject to
closing conditions including, among others, approvals of regulators.
Additional factors that could cause the company's results to differ
materially from those described in the forward-looking statements can be
found under “Risk Factors,” “Business – Competition,” “Business –
Supervision and Regulation” and “Management's Discussion and Analysis of
Financial Condition and Results of Operations” in the company's Annual
Report on Form 10-K for the year ended November 30, 2010 and
“Management's Discussion and Analysis of Financial Condition and Results
of Operations” in the company's Quarterly Reports on Form 10-Q for the
quarters ended February 28, 2011, May 31, 2011 and August 31, 2011,
which are filed with the SEC and available at the SEC's internet site (http://www.sec.gov).
DISCOVER FINANCIAL SERVICES(unaudited, in millions, except per share statistics)
Quarter EndedNov 30,
Aug 31,
Nov 30,2011
2011
2010EARNINGS SUMMARY
Interest Income
$1,620
$1,599
$1,499
Interest Expense
360
362
375
Net Interest Income
1,260
1,237
1,124
Discount/Interchange Revenue
489
517
453
Rewards
215
234
203
Discount and Interchange Revenue, net
274
283
250
Fee Products Revenue
107
108
103
Loan Fee Income
87
84
72
Transaction Processing Revenue
48
44
40
Other Income
30
33
7
Total Other Income
546
552
472
Revenue Net of Interest Expense
1,806
1,789
1,596
Provision for Loan Losses
319
100
383
Employee Compensation and Benefits
229
242
200
Marketing and Business Development
144
133
150
Information Processing & Communications
69
64
67
Professional Fees
114
106
104
Premises and Equipment
18
18
17
Other Expense
95
79
90
Total Other Expense
669
642
628
Income Before Income Taxes
818
1,047
585
Tax Expense
305
398
235
Net Income
$513
$649
$350
Net Income Allocated to Common Stockholders
$508
$642
$347
PER SHARE STATISTICS
Basic EPS
$0.95
$1.18
$0.64
Diluted EPS
$0.95
$1.18
$0.64
Common Stock Price (period end)
$23.82
$25.16
$18.28
Book Value per share
$15.59
$14.88
$11.85
SEGMENT- INCOME BEFORE INCOME TAXES
Direct Banking
$776
$1,009
$554
Payment Services
42
38
31
Total
$818
$1,047
$585
BALANCE SHEET SUMMARY
Total Assets
$68,784
$65,726
$60,785
Total Liabilities
$60,542
$57,720
$54,328
Total Equity
8,242
8,006
6,457
Total Liabilities and Stockholders' Equity
$68,784
$65,726
$60,785
TOTAL LOAN RECEIVABLES STATISTICS
Ending Loans 1, 2
$57,337
$54,082
$48,836
Average Loans 1, 2
$55,539
$53,013
$48,597
Interest Yield
11.56
%
11.83
%
12.24
%
Net Principal Charge-off Rate
2.81
%
3.43
%
6.58
%
Net Principal Charge-off Rate Excluding PCI Loans 3
3.05
%
3.63
%
6.58
%
Delinquency Rate (over 30 days) 3
2.30
%
2.35
%
3.89
%
Delinquency Rate (over 90 days) 3
1.14
%
1.17
%
2.03
%
Net Charge-off Dollars
$387
$459
$797
Loans Delinquent Over 30 Days 3
$1,200
$1,203
$1,902
Loans Delinquent Over 90 Days 3
$596
$599
$994
Allowance for Loan Loss (period end)
$2,205
$2,273
$3,304
Change in Loan Loss Reserves
($68
)
($359
)
($414
)
Reserve Rate 4
3.85
%
4.20
%
6.77
%
Reserve Rate Excluding PCI Loans 3, 4
4.23
%
4.44
%
6.77
%
CREDIT CARD LOANS STATISTICS
Ending Loans
$46,639
$46,178
$45,157
Average Loans
$45,756
$45,343
$44,670
Interest Yield
12.36
%
12.46
%
12.68
%
Net Principal Charge-off Rate
3.24
%
3.85
%
6.95
%
Delinquency Rate (over 30 days)
2.39
%
2.43
%
4.06
%
Delinquency Rate (over 90 days)
1.20
%
1.22
%
2.12
%
Net Charge-off Dollars
$370
$440
$774
Loans Delinquent Over 30 Days
$1,117
$1,121
$1,831
Loans Delinquent Over 90 Days
$560
$565
$958
Allowance for Loan Loss (period end)
$2,070
$2,154
$3,209
Change in Loan Loss Reserves
($84
)
($365
)
($412
)
Reserve Rate
4.44
%
4.66
%
7.11
%
Total Discover Card Volume
$26,946
$28,455
$25,054
Discover Card Sales Volume
$25,033
$26,271
$23,219
NETWORK VOLUME
PULSE Network
$33,911
$35,109
$31,334
Third-Party Issuers
1,939
1,984
1,768
Diners Club International 5
7,469
7,660
7,328
Total Payment Services
43,319
44,753
40,430
Discover Network - Proprietary
25,926
27,133
24,075
Total
$69,245
$71,886
$64,505
1 Total Loans includes mortgages and other loans.
2 Purchased Credit Impaired ("PCI") loans are loans
that were acquired in which a deterioration in credit quality
occurred between the origination date and the acquisition date.
These loans were initially recorded at fair value and accrete
interest income over the estimated lives of the loans as long as
cash flows are reasonably estimable, even if the loans are
contractually past due. PCI loans are private student loans and
are included in total loan receivables.
3 Excludes PCI loans (described above) which are
accounted for on a pooled basis. Since a pool is accounted for as
a single asset with a single composite interest rate and aggregate
expectation of cash flows, the past-due status of a pool, or that
of the individual loans within a pool, is not meaningful. Because
the company is recognizing interest income on a pool of loans, it
is all considered to be performing.
4 The Reserve Rate includes federal student loans held
for sale.
5 Volume is derived from data provided by licensees for
Diners Club branded cards issued outside of North America and is
subject to subsequent revision or amendment.
Note: See Glossary for definitions of financial terms in the
financial supplement which is available online at the SEC's
website (http://www.sec.gov)
and the company's website (http://investorrelations.discoverfinancial.com).
Discover Financial ServicesInvestors:Craig Streem,
224-405-3575craigstreem@discover.comorMedia:Jon
Drummond, 224-405-1888jondrummond@discover.com

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